What is Money?

To understand money, we must first understand the concept of trade; exchanging one thing for another. As human beings began to leave their hunter-gatherer lifestyles behind, agrarian (farming-based) societies began to form. With newly found sedentary forms of living, human beings were able to experience periods of surplus. Surplus is defined as having an excess amount of something. Those with a surplus could afford to trade their surplus of goods, such as wheat or livestock, for things that they may need such as pottery or milk. However, beyond a certain point, for example, deducing the barter price of a good may become difficult as a gallon of milk may or may not be enough to trade for a chicken. So what was humanity to do?

At about 600 B.C.E., in what is now modern day Turkey, the Kingdom of Lydia introduced what may have been the first coinage system. They used an alloy of gold and silver, to mint coins. These coins were then stamped by the Lydian government to authenticate their value. The held various sizes and weight to mark different values. Trade was then conducted with these coins, facilitating more efficient trade. In China, during the Tang Dynasty (approximately 700 C.E.), merchants began using promissory notes to avoid carrying large sums of coins. At around 1020 C.E., the Chinese government then began printing paper money.

However, this type of money still represents a promissory note backed by the Chinese government. This means that the paper money could be turned in for the amount of precious metal stated on the note. We no longer have this system. In 1971, President Nixon removed the United States’ ability to convert paper money into gold on an international scale. This removed many currencies, tied to the U.S. dollar, from the gold standard. Paper money then turned to fiat money. Fiat money is backed only by the issuing government’s promise to pay- not gold or any other commodity.